London, 2 March 2017 – Personal contract purchase (PCP) agreements have been increasingly popular in UK car finance over the past few years. Primarily because they represent a cheaper, monthly instalment, means to get a new car. They have been used by car manufacturers, through their financial subsidiaries, and dealers to reignite the new car market during the 2008/2011 financial crisis and are now being used to push repeat purchases either at, or prior to, the end of contracts, leading the UK new car market to achieve record levels. However, it should be noted that risks for lenders may be also increasing.
PCP agreements were first introduced over a decade ago, representing 53% of new cars bought on finance by personal consumers in 2009 and 76% in 2015, boosting the share of car finance on all private new car sales to 86.6% in 2016 from 45.8% in 2009.
More recently PCP agreements are also becoming increasingly available for used cars, having already represented 39% of used cars bought on finance by personal consumers in 2015 (up from 26% in 2013 and 12% in 2010).
Increase of PCP agreements may represent higher risks for lenders because consumers are “buying” a new car more often, which means that used cars available for sale are increasing, which puts pressure on prices of used cars to fall, and a potential decrease in used cars values will lead to an increase of returned vehicles for lenders at impaired value.
From the perspective of credit ratings for Asset-Backed Securities (ABS) transactions for auto loans or leases, ARC will incorporate the increase in the Residual Value (RV) risk into its analysis, notably in the review of originator’s RV setting policy, and therefore ARC may increase stresses applied to quantitative analysis to ensure that the level of credit enhancement in the structure is adequate for the increased RV risk.